Supply Chain Network

Planning
PGDM (2019-21): Term IV
Supply Chain and Logistics Management (OPM 19402)

Sessions # 10 ~ 11

8/12/2020 Prof Kalyana C Chejarla

 Framework for Network Design Decisions

Competitive STRATEGY GLOBAL COMPETITION

PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES

PRODUCTION TECHNOLOGIES REGIONAL DEMAND

Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination

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 Network Design Decisions

4. Decide 1. Facility
whether to keep Location
a location open (Regional) &
or shut Capacity
(TelecomOptic) (SunOil)

3. Allocate
demand to 2. Site Selection
existing (Steel
locations Appliances)
(TelecomOptic)

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 PRELIMINARIES

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 Network Planning Solution Techniques

• Mathematical optimization techniques:

1. Exact algorithms: find optimal solutions

2. Heuristics: find “good” solutions, not

necessarily optimal

• Simulation models: provide a mechanism to

evaluate specified design alternatives created by
the designer.

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 Simple Example (Market & Supply Allocation)
• Single product
• Two plants p1 and p2
– Plant p2 has an annual capacity of 60,000 units.
– Plant p1 can product any quantity
• The two plants have the same production costs.
• There are two warehouses w1 and w2 with identical
warehouse handling costs.
• There are three markets areas c1,c2 and c3 with demands of
50,000; 100,000 and 50,000, respectively.
• Unit Distribution costs are as below:
Facility (→) p1 p2 c1 c2 c3
Warehouse (↓)
w1 0 4 3 4 5
w2 5 2 2 1 2

Question: How much quantity must be shipped from each plant → warehouse → market?

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 Heuristic #1
Choose the Cheapest Upstream to Source Demand

Facility (→) p1 p2 c1 c2 c3
Warehouse (↓)
w1 0 4 3 4 5
w2 5 2 2 1 2

p1 w1 c1
D = 50,000
$2 x 50,000

c2
$5 x 140,000 D = 100,000
p2
w2
$1 x 100,000
$2 x 60,000
Cap = 60,000 c3
$2 x 50,000 D = 50,000

Total Costs = $1,120,000

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 Heuristic #2
Choose the warehouse with least total (inbound + outbound)
costs

c1
$0 w1
$3 D = 50,000
p1 p1 →w1 → c1 $3
p1 → w2 → c1 $7
p2 → w1 → c1 $7
$4 $2 c2 p2 → w2 → c1 $4
$5
$5 D = 100,000
p2 $4
p1 →w1 → c2 $4
$1 p1 → w2 → c2 $6
p2 → w1 → c2 $8
$2 p2 → w2 → c2 $3
Cap = 60,000 c3
w2 $2 D = 50,000
p1 →w1 → c3 $5
p1 → w2 → c3 $7
p2 → w1 → c3 $9
p2 → w2 → c3 $4

c1 is served by w1, c2 and c3 are served by w2

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 Heuristic #2 Cont’d
Choose the warehouse with least total (inbound + outbound)
costs
c1 is served by w1, c2 and c3 are served by w2

w1 c1
p1
$0 x 50,000
$3 x 50,000 D = 50,000
p1 →w1 → c1 $3
p1 → w2 → c1 $7
p2 → w1 → c1 $7
c2 p2 → w2 → c1 $4

$5 x 90,000 D = 100,000
p2 w2
p1 →w1 → c2
p1 → w2 → c2
$4
$6
$1 x 100,000
p2 → w1 → c2 $8
$2 x 60,000 p2 → w2 → c2 $3
Cap = 60,000 c3
$2 x 50,000 D = 50,000
p1 →w1 → c3 $5
p1 → w2 → c3 $7
p2 → w1 → c3 $9
p2 → w2 → c3 $4

Total Cost = $920,000

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 The Optimization Model
The problem described earlier can be framed as the
following linear programming problem.

Let
– x(p1,w1), x(p1,w2), x(p2,w1) and x(p2,w2) be the flows from the
plants to the warehouses.
– x(w1,c1), x(w1,c2), x(w1,c3) be the flows from the warehouse w1
to customer zones c1, c2 and c3.
– x(w2,c1), x(w2,c2), x(w2,c3) be the flows from warehouse w2 to
customer zones c1, c2 and c3

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 The Optimization Model
Facility (→) p1 p2 c1 c2 c3
Warehouse (↓)
w1 0 4 3 4 5
w2 5 2 2 1 2
The problem we want to solve is:
minimize {0x(p1,w1) + 5x(p1,w2) + 4x(p2,w1)
+ 2x(p2,w2) + 3x(w1,c1) + 4x(w1,c2)
+ 5x(w1,c3) + 2x(w2,c1) +1x(w2,c2) + 2x(w2,c3)}

subject to the following constraints:

x(p2,w1) + x(p2,w2)  60000 ← Plant 2 capacity constraint
x(p1,w1) + x(p2,w1) = x(w1,c1) + x(w1,c2) + x(w1,c3) ← No inventory @ w1
x(p1,w2) + x(p2,w2) = x(w2,c1) + x(w2,c2) + x(w2,c3) ← No inventory @ w2
x(w1,c1) + x(w2,c1) = 50000 ← c1 is met
x(w1,c2) + x(w2,c2) = 100000 ← c2 is met
x(w1,c3) + x(w2,c3) = 50000 ← c3 is met

all flows greater than or equal to zero.

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 Optimal Solution

Facility p1 p2 c1 c2 c3
warehouse

w1 140,000 0 50,000 40,000 50,000

w2 0 60,000 0 60,000 0

Total cost for the optimal strategy is $740,000

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 Simulation Models

• Useful for a given design and a micro-

level analysis. Examine:
– Individual ordering pattern.
– Specific inventory policies.
– Inventory movements inside the warehouse.
• Not an optimization model
• Can only consider very few alternate
models

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 Which One to Use?

• Use mathematical optimization for static

analysis
• Use a 2-step approach when dynamics in
system must be analyzed:
– Use an optimization model to generate several
least-cost solutions at the macro level,
considering the most important cost
components.
– Use a simulation model to evaluate the
solutions generated in the first phase.

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 1. Facility Location & Capacity (SunOil)

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 Capacitated Plant Location Model (General)
Capacity Allocation
n = number of potential plant locations/capacity
m = number of markets or demand points yi = 1 if plant i is open, 0 otherwise
D j = annual demand from market j xij = quantity shipped from plant
i to market j
K i = potential capacity of plant i
f i = annualized fixed cost of keeping plant i open
cij = cost of producing and shipping one unit from plant i to market j (cost
includes production, inventory, transportation, and tariffs)

n n m
Minå f i yi + å åc x ij ij
i=1 i=1 j=1
n
subject to
åx ij
= D j for j = 1,...,m
i=1
m

åx ij
= K i yi for i = 1,...,n
j=1

yi Î {0,1} for i = 1,...,n, x ij ³ 0

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 2. Site Selection
Gravity Location Model
xn, yn: Coordinate location of either a market or supply source n
Fn: Cost of shipping one unit for one mile between the facility and
either market or supply source n
Dn: Quantity to be shipped between facility and market or supply
source n
(x, y) is the location selected for the facility, the distance dn between
the facility at location (x, y) and the supply source or market n is given
by

(x – x ) + ( y – y )
2 2
dn = n n

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 Gravity Location Model (Steel Appliances)

Transportation Cost Quantity in Tons Coordinates

Sources/Markets $/Ton Mile (Fn) (Dn) xn yn
Supply sources
Buffalo 0.90 500 700 1,200
Memphis 0.95 300 250 600
St. Louis 0.85 700 225 825
Markets
Atlanta 1.50 225 600 500
Boston 1.50 150 1,050 1,200
Jacksonville 1.50 250 800 300
Philadelphia 1.50 175 925 975
New York 1.50 300 1,000 1,080

k
Total transportation cost TC =  d n Dn Fn
n =1

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 3. Allocate Demand to existing locations
(TelecomOne & HighOptic)

Demand City
Production and Transportation Cost
per Thousand Units (Thousand $) Monthly Monthly
Capacity Fixed Cost
(Thousand (Thousand
Company Supply City Atlanta Boston Chicago Denver Omaha Portland Units) K $) f
TELECOM Baltimore 1,675 400 985 1,630 1,160 2,800 18 7,650
ONE
Memphis 380 1,355 543 1,045 665 2,321 22 4,100
Wichita 922 1,646 700 508 311 1,797 31 2,200
HIGHOPTI Cheyenne 1,460 1,940 970 100 495 1,200 24 3,500
C
Salt Lake 1,925 2,400 1,450 500 950 800 27 5,000
City
Monthly 10 8 14 6 7 11
demand
(thousand
units) Dj

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 Demand Allocation (General Model)
Supply > Demand

• Allocating demand to production facilities

n = Number of factory locations

m = Number of markets or demand points xij = Quantity shipped from factory i to
D j = Annual demand from market j market j

K i = Capacity of factory i
cij = Cost of producing and shipping one unit from factory i to market j

n m n

Min cij xij subject to x

i =1
ij = D j for j = 1,..., m
i =1 j =1 m

x
j =1
ij = K i for i = 1,..., n

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 Optimal Demand Allocation

Atlanta Boston Chicago Denver Omaha Portland

TelecomOne Baltimore 0 8 2

Memphis 10 0 12

Wichita 0 0 0

HighOptic Salt Lake 0 0 11

Cheyenne 6 7 0

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 4. Supply Allocation & facility decision
(General Model)

• Merge the companies

• Solve using location-specific costs
yi = 1 if factory i is open, 0 otherwise
xij = quantity shipped from factory i to market j

n n m
Minå f i yi + å åc x ij ij
i=1 i=1 j=1

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 4a. Capacitated Model with Single Sourcing

• Market supplied by only one factory

• Modify decision variables

yi = 1 if factory i is open, 0 otherwise

xij = 1 if market j is supplied by factory i, 0 otherwise
n n m
Minå f i yi + å å D j cij xij
i=1 i=1 j=1

subject to
n

åx ij
= 1 for j = 1,...,m
i=1
m

åD x i ij
£ K i yi for i = 1,...,n
j=1

xij , yi Î {0,1}

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 Capacitated Model with Single Sourcing

Open/
Closed Atlanta Boston Chicago Denver Omaha Portland
Baltimore Closed 0 0 0 0 0 0

Cheyenne Closed 0 0 0 0 0 0

Salt Lake Open 0 0 0 6 0 11

Memphis Open 10 8 0 0 0 0

Wichita Open 0 0 14 0 7 0

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 Supply Chains of Toyota & Amazon

Toyota ~ 4V & S (12:46 minutes)

https://www.youtube.com/watch?v=IRb4yOKrzs0&list=PLLXjA2RC_qClHMJA
-bh6zX6MBePPql8P6&index=6&t=0s

Behind the scenes of an Amazon Warehouse (Fox News) (4:51 minutes)

https://www.youtube.com/watch?v=Y-lBvI6u_hw

Sinofert Holdings Limited: Urea Distribution Planning

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 Q & A / DISCUSSION

8/12/2020 Prof Kalyana C Chejarla